Problem Spellman Company acquires 90% of Moore Company in a business combination. The total consideration is agreed upon, but the exact nature of Spellman's payment is not yet fully specified. This business combination is accounted for as a purchase. It is expected that at the date of the business combination, the fair value will exceed the book value of Moore's assets minus liabilities. Spellman desires to prepare consolidated financial statements that include the financial statements of Moore. Required: a. Explain how the method of accounting for a business combination affects whether goodwill is reported. b. If goodwill is recorded, explain how to determine the amount of goodwill. c. From a conceptual standpoint, explain why consolidated financial statements should be prepared. d. From a conceptual standpoint, identify the first necessary condition before consolidated financial statements are prepared. Step-by-step solution 1. Step 1 of 4 a. Under purchase accounting, goodwill is reported if the purchase price exceeds fair value of the acquired tangible and intangible net assets. Comment 2. Step 2 of 4 b. All identifiable tangible and intangible assets acquired, either individually or by type, and liabilities assumed in a business combination, whether or not shown in the financial statements of Moore, should be assigned a portion of the cost of Moore, normally equal to the fair values at date of acquisition. Then, the excess of the cost of Moore over the sum of the amounts assigned to identifiable tangible and intangible assets acquired less the liabilities assumed is recorded as goodwill. Comment 3. Step 3 of 4 c. Consolidated financial statements should be prepared to present financial position and operating results in a manner more meaningful than in separate statements. Such statements often are more useful for analysis purposes